Swirlpool, Inc. has found that its cost of common equity capital is 18 percent, and its cost of debt capital is 8 percent. The firm is financed with 60 percent common shares and 40 percent debt. What is the after-tax weighted average cost of capital for Swirlpool, if it is subject to a 40 percent marginal tax rate?

Question

Beck

Business

28 October, 08:53

Swirlpool, Inc. has found that its cost of common equity capital is 18 percent, and its cost of debt capital is 8 percent. The firm is financed with 60 percent common shares and 40 percent debt. What is the after-tax weighted average cost of capital for Swirlpool, if it is subject to a 40 percent marginal tax rate?

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Cullen Erickson · Answer 1

12.72%

Explanation:

The formula to compute WACC is shown below:

= Weightage of debt * cost of debt * (1 - tax rate) + (Weightage of common stock) * (cost of common stock)

= (0.40 * 8%) * (1 - 40%) + (0.60 * 18%)

= 1.92% + 10.8%

= 12.72%

Simply we multiply the capital structure weighatge with its cost so that the correct cost of capital can come.